PART III
International Finance in Economic Relations System
Chapter 6
Foreign Direct Investment (FDI)
Instructor: Dr. Thu Huong Tran
Faculty of International Business
School of Economics – Can Tho University
Email: huongtran@[Link]
OUTLINE
A B C
A OVERVIEW
B TRENDS OF FDI
C FDI AND VIETNAM
I- OVERVIEW
Definition
- According to the IMF, FDI is an investment activity carried out to achieve long-term
benefits in an enterprise operating in the territory of an economy other than the investor’s
economy, the investor’s purpose is to gain real management rights of the enterprise.
- According to OECD, FDI is made to establish long-term economic relationships with a
business, especially investments that bring the ability to influence the economy. Managing
the above mentioned enterprise by: (i) Establishing or expanding an enterprise or a branch
under the full management of the investor; (ii) Acquiring all existing businesses; (iii)
Participate in a new business; and (iv) long-term credit (>5 years).
- The WTO believes that: “Foreign direct investment takes place when an investor from one
country (the investor country) acquires an asset in another country (the investment recipient
country) with the right to manage that asset”.
I- OVERVIEW
Definition
FDI is a form of international investment in which an investor from one country invests all
or a large enough capital in a project in another country to gain control or participate in
control of that project.
Characteristics of FDI
- FDI is mainly private investment with the primary purpose of seeking profits.
- Foreign investors must contribute a minimum capital ratio in legal capital or charter capital
depending on the laws of each country to gain control or participate in controlling the
enterprise receiving investment.
- The investor decides on investment, production and business and is responsible for losses
and profits. This form is feasible and highly economically effective, without political
constraints.
- FDI is often accompanied by technology transfer to investment-receiving countries through
bringing machinery, equipment, patents, inventions, technical know-how, management
staff... into the investment-receiving country to project implementation.
I- OVERVIEW
Classification in the Form of FDI investment capital
• Once a firm undertakes FDI it becomes a multinational enterprise.
1. Based on ENTRY MODE:
• There are two forms of FDI
– A greenfield investment (the establishment of a wholly new operation in a
foreign country)
– Acquisition or merging with an existing firm in the foreign country
I- OVERVIEW
The Form of FDI: Acquisitions versus Greenfield Investments
• The majority of cross-border investment involves mergers and acquisitions rather than
greenfield investments
• Firms prefer to acquire existing assets because
• Mergers and acquisitions are quicker to execute than greenfield investments
• it is easier and perhaps less risky for a firm to acquire desired assets than build
them from the ground up
• firms believe they can increase the efficiency of an acquired unit by transferring
capital, technology, or management skills
I- OVERVIEW
Classification
2. Based on legal form:
- Business cooperation contract: is a document signed between two or more parties to
conduct business investment that clearly stipulates the responsibility to share business
results for each party without establishing a new legal entity.
- Joint venture enterprise is an enterprise established in the host country on the basis
of a joint venture contract signed between two or more parties. In special cases, it can
be established on the basis of an agreement signed between two or more parties.
countries, to conduct investment and business in the host country.
- Enterprise with 100% foreign capital: is an enterprise owned by foreign investors,
established by foreign investors in the host country, self-managed and responsible for
business results.
I- OVERVIEW
Types of FDI
Horizontal FDI is the most popular form of investment today. For this form, investors
will focus capital on a foreign enterprise in the same industry and business field of
the company operated and owned by the FDI investor. At this time, two businesses
together produce and trade similar products, supporting each other to develop.
Vertical FDI is a form of investment in the supply chain, which includes many
different industries. This is a type of FDI that businesses invest in part or all of the
production, business or supply of raw materials for their products.
Benefits
I- OVERVIEW
- Because foreigners are the ones directly operating and managing capital, they
have high responsibility and good skills.
- Exploit mineral resources and abundant labor resources. Increase employment
and train high quality workers.
- Expanding the consumer market entails a large production scale, improving
production, reducing product prices in accordance with consumer income.
- Avoid trade protection barriers and trade fees of the receiving country.
- Additional capital sources for domestic socio-economic development, promoting
economic growth.
- Create a large source of budget revenue for both sides.
II- TRENDS OF FDI
Both the flow and stock of FDI in the world economy has increased
over the last 20 years
FDI has grown more rapidly than world trade and world output
because
- Firms still fear the threat of protectionism
- The general shift toward democratic political institutions and free
market economies has encouraged FDI
- The globalization of the world economy is prompting firms to
undertake FDI to ensure they have a significant presence in many
regions of the world
GLOBAL T R A D E